EU ETS revision: Strategic emissions pricing for competitive shipping and aviation

Aviation

Ensure the ETS raises ambition where international regulations fall short: CORSIA

International aviation’s climate impacts are in theory regulated by the International Civil Aviation Organization (ICAO)’s emission reduction mechanism, called CORSIA (the Carbon Offsetting and Reduction Scheme for International Aviation). While some argue that CORSIA negates the need for regional regulations like the EU ETS, CORSIA’s shortcomings mean the ETS is still crucial.

CORSIA is structurally incapable of meeting either the EU’s or even the ICAO’s own goals and standards. The regulation requires only emission offsetting rather than reduction; only targets emissions above a high baseline that is not incrementally lowered (as the ETS cap is); is only mandatory from 2027 but with no enforcement mechanism; and has no roadmap beyond 2035. In 2021 an unpublished European Commission assessment found CORSIA ineffectual, and little has changed since. The ETS, on the other hand, is demonstrably effective at reducing emissions.

Strengthen the EU ETS to amplify its supportive effect on innovative, clean industry in light of CORSIA's ineffectiveness.

Expand ETS scope: extra-EEA flights

Since 2012, the development of CORSIA has been used to justify the exemption of flights between airports in the European Economic Area (EEA) and non-EEA airports from the EU ETS. This free pass has had grave climate consequences, leaving around 1,1bn tCO2 emissions unregulated between 2012 and 2023, the equivalent of Greece’s total emissions in the same period. This amounts to €26 billion in uncollected revenues that could have been used for climate action.

The exemption is set to expire in 2027. Failing to bring extra-EEA aviation into the ETS in the 2026 revision would see a further 1,3bn tCO2 unregulated between 2027 and 2035, and €130bn lost in uncollected revenues. Meanwhile, European aviation is projected to drastically overshoot EU climate targets, and truly green solutions are not scaling at the pace needed.

The 2026 revision must end the ETS exemption for extra-EEA flights.

Target ETS revenues to develop the lowest-emission solutions: e-kerosene and zero carbon emission aircraft

All credible fuel pathways to net-zero aviation involve renewable fuels of non-biological origin (RFNBOs). These include e-kerosene produced from renewable hydrogen, or renewable hydrogen itself used in zero carbon emission aircraft. These fuel solutions:

• Have the greatest potential to lower emissions on a full lifecycle basis.

• Minimise threats to biodiversity in their production.

• Are the most scalable fuel solutions and therefore best promise long term industrial resilience, domestic economic benefits and energy security.

E-kerosene production is currently not on track, with no large-scale projects having reached final investment decision despite the binding targets set out in the ReFuelEU Aviation (RFEUA). Additionally, SAF allowances have not to date proved effective in driving its uptake.

Zero carbon emission flight technologies also face steep barriers to investment and lack supportive policy, despite the economic opportunities they offer. Flights of less than 1.000km – including those connecting islands and remote territories – will provide important initial routes for zero carbon emission aircraft, accelerating climate goals and connectivity in tandem. Investment into research and development for zero carbon emission flight has the potential to have positive spillovers to other sectors of the economy. Private jets are another part of the industry that could prove to be effective testbeds for innovation in zero carbon emission flight – if existing private jet use is effectively priced.

On the other hand, biofuels currently enjoy outsized EU policy support, yet have greater lifecycle emissions than renewable hydrogen solutions and when produced at scale can jeopardise biodiversity. Furthermore, feedstock limitations will lead to future price spikes and dependence on foreign imports, undermining competitiveness and energy security.

Both e-kerosene and zero carbon emission technologies would benefit from expanding the ETS scope, since pricing more emissions would better bridge the price gap between fossil fuels and sustainable alternatives. Capping extra emissions would further strengthen the demand signal for clean alternatives.

But the ETS revision must do more to support clean EU industry. ETS revenues should be strategically targeted to support innovative technologies and create the stability needed to de-risk private investment.

EU ETS revenues should be earmarked for developing renewable hydrogen solutions, and not unsustainable products like biofuels.

Despite the ETS’s benefits, it will not be sufficient alone: aviation emissions covered by the ETS are on the rise, and extending the ETS scope must be complemented by strengthening the RFEUA to further reduce emissions, and an ambitious Sustainable Transport Investment Plan (STIP) to most efficiently and effectively use revenues.

The STIP should establish a contracts for difference (CfD) scheme backed by a market intermediary with a double-sided auctioning system.  This would help projects access long-term offtake agreements, reducing risk to help unlock investment to overcome high initial capital expenditure (CAPEX) costs. Furthermore, basing support on delivery, as opposed to lump sum, project-based payments, is the most effective means of using funds as it rewards efficient project development. Additional fixed percentage CAPEX support could further help small projects facing high initial costs.

Analysis shows that if the ETS aviation scope were expanded to emissions from flights departing the EEA, 25% of the generated revenues could fund CfDs for enough e-kerosene to meet RFEUA mandates until 2040, or a substantial percentage of the €10-20bn of European e-kerosene producers’ capital requirements up to 2030.

Aviation ETS revision recommendations

To meet aviation emissions targets, forge global competitiveness and achieve energy autonomy, the 2026 ETS revision must:

1. Strengthen EU ETS to amplify its supportive effect on innovative, clean industry in light of CORSIA's ineffectiveness.

2. Expand the ETS scope to extra-EEA flight emissions.

3. Earmark revenues to develop renewable hydrogen solutions in coordination with the STIP.

Maritime

Ensure the ETS raises ambition where international regulations fall short: International Maritime Organization

In April 2025, the International Maritime Organization (IMO) approved its 'IMO Net-Zero Framework' for reducing greenhouse gas (GHG) emissions. The mechanism will apply a 'two-tier' global fuel standard to vessels over 5.000 GT sailing on international voyages, put a limited price on emissions (a fee payment for non-compliant ships), and reward ships using “zero and near-zero-emission” fuels and technologies. While some have argued that the IMO agreement negates the need for regional regulations like the EU ETS, shortcomings in the IMO agreement means the ETS is still crucial.

The IMO Net-Zero Framework has been widely considered to fall short of the level of ambition that the international shipping industry needs to reach net-zero. Analysis suggests that the initial ‘tier 2’ penalties will not adequately incentivise a shift towards renewable hydrogen-derived fuels with the lowest lifecycle emissions, but may more likely see vessels adopt cheaper fuels with higher emission intensities.

Not only is the boost the Framework provides these most sustainable solutions inadequate, but the limited pricing system generates fewer and less predictable revenues than the EU ETS, limiting available funds to invest in developing clean maritime solutions. In addition, the Framework allows ships to meet compliance criteria with unsustainable first generation biofuels, that do not qualify for compliance with EU law.

The IMO and EU frameworks should be understood as complementary: the IMO sets a global floor for ambition, ensuring the EU does not act alone, while the EU raises the bar for action. Compliance with both would create the best financial incentives for the transition to renewable hydrogen fuels.

The 2026 revision must strengthen the EU ETS to appropriately complement the IMO Framework in light of its shortcomings, and the EU must continue to encourage robust international action at the IMO.

Expand ETS scope: vessels between 400 and 5.000 GT

Maritime emissions have been included in the EU ETS since 2025, however only the largest vessels, those over 5.000 gross tonnage (GT), are in scope. Ships between 400 and 5.000 GT make up 15% of total maritime emissions, yet the ETS does not price their emissions.

Expanding the ETS scope to include these emissions would accelerate maritime decarbonisation and competitiveness by:

1. Capping more maritime emissions and better incentivising the sector’s energy transition.

2. Narrowing the price gap between fossil fuels and zero emission technologies for smaller vessels which are well placed to utilise novel systems such as batteries and renewable hydrogen fuel cells.

3. Generating more revenues which can be invested in innovative clean maritime technologies via CfD schemes, that in turn build industrial competitiveness and deliver green growth.

The 2026 revision should expand the maritime ETS scope to include vessels between 400 and 5.000 GT.

Target ETS revenues to develop the lowest-emission solutions: maritime e-fuels

Any revenues targeted to support alternative fuels must be limited to renewable fuels of non-biological origin (RFNBOs), including maritime synthetic fuels and renewable hydrogen. As with renewable hydrogen-based aviation fuel solutions, these can have the lowest lifecycle emissions and are the most scalable, bringing economic benefits and energy security.

EU ETS revenues should be earmarked for developing renewable hydrogen-based maritime solutions, and not unsustainable products like biofuels.

The STIP and upcoming Maritime Industrial Strategy must complement this policy by introducing a mechanism that re-invests a proportion of EU ETS revenues into developing and de-risking EU RFNBO production, in turn supporting wider industrial competitiveness goals.

Other regulatory frameworks can also support the uptake of maritime RFNBOs, for example the introduction of more stringent targets for RFNBO adoption under FuelEU Maritime. Lessons can also be learned from the aviation sector, where similar challenges exist around scaling EU production of alternative aviation fuels.

Maritime ETS revision recommendations

To meet maritime emissions targets, forge a global competitive edge in green shipping, and build energy autonomy, the 2026 ETS revision must:

1. Ensure the ETS is strengthened and not diluted as the IMO Net-Zero Framework is implemented.

2. Expand the ETS scope to 400–5.000 GT vessels.

3. Earmark revenues to develop renewable hydrogen solutions in coordination with the STIP and Maritime Industrial Strategy.